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HOA Liens May Wipe Out Mortgage Upon Foreclosure

Nonjudicial foreclosure of superpriority liens as allowed by NRS 116.3116 for homeowners’ associations (HOA) extinguishes a first deed of trust held by the mortgage lender.

In essence, the HOA may elect to foreclose on up to nine (9) months of unpaid HOA dues and can, with notice to the other lien holders, effectively wipe out the junior lien holder’s interest for a pittance of the home’s value.

For example, a borrower/homeowner buys a $300,000 home with an 80/20 first and second loans from different lenders, A & B. Buyer decides that the HOA isn’t holding up its end of the bargain, maybe by charging outrageous HOA dues for nothing more than minimal landscaping, and stops paying HOA dues of $100/month. While it will take some time, and the normal nonjudicial foreclosure steps must be taken, if the HOA notices lenders A & B of the homeowner’s default and the foreclosure sale, the HOA could technically, foreclose on the home for $900. It should be extremely unlikely that a lender would let that happen; but where is the lender’s economic break-even point if the value of the other liens isn’t considered in the foreclosure? For cash investors of defaulted homes, this is a boondoggle.

While home loans should not be as easy as the carefree Countrywide/no-stated income days, this decision may make it more difficult for home buyers in Nevada’s HOA communities.

The full opinion of SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. Adv. Op. 75 (2014) can be read here.